Economic Momentum 'Strained' in Early 2021

Vaccine rollout remains in focus with the UK and US leading major economies in distribution while Canada and Europe lag behind amid frustrating shipment delays. Even so, vaccine distribution is ramping up more quickly than was expected just three months ago. That was evident in the IMF’s latest World Economic Outlook that saw its 2021 global growth forecast lifted by 0.3 ppts on top of a 0.9 ppt upward revision to its 2020 projection (now assuming a less severe decline). While vaccine rollout will see economic activity pick up over the course of this year, the IMF warned that “renewed waves and new variants of the virus pose concerns for the outlook.”

Indeed, concern about the prevalence of new, faster-spreading strains of COVID-19 has health officials on guard. While lockdowns have helped flatten the curve in many regions, policymakers are being cautious in loosening containment measures. Economic activity was stronger than anticipated late last year but tighter restrictions extending into early-2021 have us expecting first quarter GDP declines in the UK and euro area. There’s risk of a negative print in Canada though the US economy should remain above stall speed. We continue to expect activity will pick up in Q2 and beyond as more widespread vaccination allows for gradual but sustained easing of health restrictions.

Central banks remain committed to supporting the recovery though some are beginning to think about an exit strategy. We look for the BoC to slow its QE program as soon as next quarter while the Fed’s tapering debate will only heat up over the course of the year. North American yields moved higher in January, though further moves will depend on risk appetite as well as central bank policy bias. Equities remain close to record highs despite volatility late last month amid frenzied action in a few heavily-shorted stocks. RBC’s US equity analysts continue to see risk of a broader market pullback in the first half of this year.

Highlights:

• Even with a slow start to the year, economic activity is expected to pick up alongside vaccine distribution. Improving growth prospects have boosted risky assets—notwithstanding some volatility in late-January—and contributed to rising government bond yields.
• The US consumer sector lost some momentum toward the end of last year but stimulus cheques have contributed to a return to growth in January. Congress is debating even more support, which lends upside risk to our 2021 US growth forecast.
• Canada carried more momentum into 2021 than we expected, but lockdowns should flatten out the recovery in Q1. Vaccine delays have been frustrating but we still expect a return to growth in Q2, with GDP getting back to pre-pandemic levels later this year.
• As the Canadian economy regains momentum, we could see the BoC trim the pace of its asset purchases in Q2. Fed officials are also starting to discuss when a QE taper might be appropriate, but Chair Powell thinks it’s too early to talk about reducing stimulus.
• Recoveries in the UK and euro area are shifting into reverse but we expect a return to growth in Q2. Both are facing a long road to recovery which should mean an extended period of monetary policy support—even if central banks are starting to sound a bit less enthusiastic about dialing up additional stimulus.

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Josh Nye is a senior economist at RBC. His focus is on macroeconomic outlook and monetary policy in Canada and the United States. His comments on economic data and policy developments provide valuable insights to clients and colleagues, and are often featured in the media.

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